The Horizon Services Company does not expect to grow. In other words, it expects its cash flows to remain constant, and it expects to distribute all equity free cash flows to the equity holders in the form of dividends; the company does not hold excess cash. The company is expected to generate an unlevered free cash flow of $3,000 per year in perpetuity. The company's income tax rate on all income statement items is 40%, and interest is tax-deductible. The company does not have forecasts for the dollar values of its financing but knows it is going to finance itself with 50% debt, 10% preferred stock, and 40% equity. The company does not intend to change the proportions of financing it will have. The company's interest rate, which is equal to its debt cost of capital is 9%. The company's preferred stock dividend rate (paid on the book value of preferred stock), which is equal to the cost of capital of preferred stock, is 10%. The company's unlevered cost of capital is 11%.  The appropriate discount rate for interest tax shields is the unlevered cost of capital for this company.

1. Value the company - the value of the firm and value of the equity - as of the end of Year 0, using the WACC valuation method and assuming its capital structure strategy was in place at the end of Year 0
2. Calculate the amount of debt and preferred stock the company would have as of the end of Year 0 based on your WACC valuation.

Answer rating: 100% (QA)

To value the company using the WACC valuation method we need to calculate the weighted average cost ... View the full answer